The Internal Revenue Service published 2023 Cost-of-Living Adjustments (COLA) in Notice 2022-55 on October 24, 2022. The COLA increases will become effective on January 1, 2023 and impact many aspects and types of retirement plans as well as Individual Retirement Accounts (IRAs).
While most of these limits are typically adjusted each year by the IRS, the changes that will take effect in 2023 are relatively significant and impact nearly all retirement-related limits. The prevailing inflation dynamics in the United States are the driving factors behind the 2023 increases being significant relative to past years when compared on a dollar-basis.
Retirement Plan Highlights:
The elective deferral limits for 401(k), 403(b) and most 457 plans increased to $22,500 for 2023 compared to $20,500 for 2022.
The catch-up contribution limit for 401(k), 403(b) and most 457 plan participants who are age 50 or older increased to $7,500 for 2023 compared to $6,500 for 2022. Therefore, plan participants who are 50 and older can contribute up to $30,000 starting in 2023.
The annual contribution limit for 401(k) plans and 403(b) plans, which includes both employee deferrals and employer contributions (e.g., match and/or profit-sharing contributions), increased to $66,000 for 2023 compared to $61,000 for 2022.
Note that catch-up contributions are not included in the annual contribution limit of $66,000, so a participant who is age 50 or older could have their 401(k) or 403(b) plan funded with up to $73,500 in 2023, assuming the plan is designed to accomplish as much and otherwised passed IRS required annual nondiscrimination tests.
Individual Retirement Account (IRA) Highlights:
The limit for annual contributions to an IRA increased to $6,500 for 2023 compared to $6,000 in 2022, but the additional catch-up contribution limit for individual aged 50 and older is not subject to a COLA and remains unchanged at $1,000.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
Here are the phase-out ranges for 2023:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $73,000 to $83,000, up from $68,000 to $78,000 in 2022.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $116,000 to $136,000, up from $109,000 to $129,000 in 2022.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $218,000 and $228,000, up from $204,000 and $214,000 in 2022.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
For a list of these and other retirement-related cost-of-living adjustments for 2023, please click HERE, or visit www.sdretirementsolutions.com.
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Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
